Financial Reporting and Analysis - Essay Example

Financial Reporting & Analysis Financial Reporting & Analysis A stakeholder is any exclusive group or person who can influence thesuccess of a company’s goals or is influenced by the success of the firm’s goals (Alexander, Britton & Jorissen 2005, p. 3). A financial statement, at times, known as a financial report, refers to a formal record any financial activity of a person, business or other entity. It is known that financial statements offer comprehensive information on the reporting firm, which is useful to existing and potential stakeholders (Rudžionienė 2006, p. 52). This paper will discuss this statement by taking into consideration the concepts of capital maintenance and also analyse the general purpose of financial statements while considering the information provided in the key components of financial statements. Question 1 In a wide systems-based perspective, an organisation is part of a much broader social system: the entity is presumed to be persuaded by, and, in effect, to have power on, the society wherein it operates (Rudžionienė 2006, p. 52). Therefore, an organisation must pay attention to the expectation of specific users of accounting information so as to gratify the interests of all users (customers, employees, suppliers, capital providers, all users, regulators and foreign suppliers and customers) in order to acquire information for their decision-making. Stakeholders need truthful and informative accounting information for them to make the accurate decisions (Rudžionienė 2006, p. 52). Enterprise’s financial accounting regulation (as an entity of accounting methods, principles and rules used for accounting and preparing and presenting financial statements) making process, according to Deegan (2003, p. 19) is vital, not just for the firm’s management, but for stakeholders, as well, who utilise the financial accounting data. Nevertheless, there is an inverse relation in that stakeholder’s interests might persuade a firm’s financial accounting law-making. The key elements of financial accounting law-making, according to Deaconu, Nistor, & Popa (2009, p. 40) are financial accounting policy selection, as well as its full disclosure in financial statements. The full disclosure financial accounting policy in financial statements is significant for stakeholders, as well: financial statements must be made, not just for regulators and investors, but also for other significant and non-significant stakeholders in order for a company to feel accountable in the community or society where it performs. Stakeholders require truthful and informative accounting information for making the right decisions (Riahi-Belkaoui 2004, p. 15). In the stakeholder theory viewpoint, Deegan (2003, p. 32) and Rudžionienė (2006, p. 52) believe that a firm is considered to be persuaded by, and, sequentially, to have power on, the society where it works. Firms could not be assessed devoid of the number of stakeholders who exist in society. Nevertheless, the anticipations of certain stakeholder groups might have more (or less) effect on corporate strategies (Rudžionienė 2006, p. 52). As a result, corporate reports cannot be regarded as neutral, impartial (or representationally faithful) papers as a number of professional accounting grounds may propose, but instead are a result of the exchange between the organisation and its surrounding and effort to mediate and accommodate many sectional interests (Woodward, Edwards & Birkin 2007, p. 334). Edwards & Bell (2010, p. 45) redefine the goal of an entity as to cater as a means for organising stakeholders. It is through the enterprise that each and every stakeholder cluster makes itself more contented through voluntary exchanges. Therefore, it is not sufficient for a firm to maximise its profit, but, in addition, the management must look to report to anyone or groups that are indirectly or directly connected to enterprises proceedings. Wallace (2011, p. 87) confirmed that the main duty of corporate management is to analyse the significance of meeting stakeholder requirements so as to attain the strategic goals of the company. As the intensity of stakeholder influence goes up, the significance of meeting stakeholder requirements also increases. The meaning of stakeholders given by Macve (2009, p. 9) is that a stakeholder is any exclusive group or person who can influence the success of a company’s goals or is influenced by the success of the firm’s goals. Clearly, a number of individuals can be categorised as stakeholders if we use the above meaning (for example, creditors, shareholders, media, government, employees, employees families, local charities, local communities and future generations among others) (Deegan 2003, p. 23). With this in mind, Deaconu, Nistor & Popa (2009, p. 40) sought to split the definition into two: primary and secondary stakeholders. A primary stakeholder, therefore, is one without whose constant participation the organisation cannot endure as a going concern. On the other hand, the narrow stakeholders include groups of people who are significant to the success and survival of the entity (Edwards & Bell 2010, p. 28). The wide stakeholders include any individual or group, which can persuade or is persuaded by the business (Edwards & Bell 2010, p. 28). The stakeholder theory has both a positive branch and a normative or ethical branch. The moral perception of the stakeholder theory lies on the moral norms. Analysing connection between stakeholders and enterprise, normally the notion of social contract is applied. In the ethical division of stakeholder premise, there is a perception how an organisation should act with regards to their stakeholders, which relates to intrinsic rights such as rights to information (financial statements). These views pertain to how the individual researchers consider organisations must act, which is not vitally going to be similar as how they, in reality, perform. There exists a perception that stakeholders have fundamental rights (for instance, fair pay and safe working conditions among other others), and these rights must not be dishonoured (Rudžionienė 2006, p. 55). In line with the normative stakeholder theory, a company should provide equal concern to the welfares of all stakeholders and, just in case these interests differ, then the business should be properly managed in order to achieve the best balance among them (Rudžionienė 2006, p. 55). Every stakeholder has a right carefully to be considered by company: 1) enterprise properly should be managed so that every stakeholder has benefit and 2) every stakeholder has a right to be offer information on how the firm (including financial statements) is impacting him or her (maybe through community sponsorship, pollution, provision of employment and safety initiatives among others) (Rudžionienė 2006, p. 55). In an eloquent managerial section of stakeholder theory, an entity is also regarded to be part of a much broader social scheme, but this view of the stakeholder theory particularly considers the diverse stakeholder groups in society, as well as how they might best be administered if the firm is to survive. In conclusion, public or private entities, government services or charities have stakeholders to whom they must be accountable. A stakeholder could be a supplier, customer, family of a worker, government agency, or another group interested in assisting an entity to attain its goals. Therefore, a stakeholder will need financial information to acquire a comprehension of mainly the performance of the firm. This record will show the amounts owed, assets owned, amounts invested in the firm and productivity to better run the operations; hence, the significance of financial statements to any stakeholder of any organisation. Question 2 A financial statement, at times, known as a financial report, refers to a formal record any financial activity of a person, business or other entity (Alexander, Britton & Jorissen 2005, p. 3). Relevant financial information is shown in a structured way that is easy to understand (Heflin, Subramanyam & Zhang 2003, p. 30). They normally comprise of basic financial statements, together with a management debate and analysis. A balance sheet informs on a firm’s liabilities, assets, as well as its ownership equity, at a particular point in time (De Franco, Kothari & Verdi 2011, p. 890). An income statement, also called a statement of expense & revenue, statement of comprehensive income, profit and loss (P&L) report, reports on a firm’s expenses, income, as well as profits over a specified time period (Alexander, Britton & Jorissen 2005, p. 15). A P&L statement offers information on the function of the firm. This comprises of sales and the numerous expenses acquired within the specified time. Finally, a statement of cash flows informs on a firm’s cash flow proceedings, mainly the investing, operating, as well as financing activities (Brown & Mohd 2003, p. 630). For large companies, these statements might be complex and might comprise of a wide-ranging set of notes to the financial reports and management discussion and study (Alexander, Britton & Jorissen 2005, p. 15). The notes normally describe each and every item on the income statement, balance sheet, as well as cash flow statement, in more details. Such notes to financial reports are regarded as an integral element of the financial reports (De Franco, Kothari & Verdi 2011, p. 890). The aim of financial reports is to offer information on the financial performance, position and transformations in financial position of an entity, which is useful to many people in making financial decisions (Brown & Mohd 2003, p. 630). Financial statements must be relevant, understandable, consistent and equivalent. Reported liabilities, assets, equity, expenses and income are directly connected to a firm’s financial position (De Franco, Kothari & Verdi 2011, p. 890). Financial reports are meant to be comprehensible by people who have a logical knowledge of financial and business activities and accounting and who are eager to learn the information diligently (McClain & McLelland 2008, p. 1). Managers and owners need financial statements to formulate vital business choice, which affect its constant duties (Alexander, Britton & Jorissen 2005, p. 35). Financial study is then carried out on these reports to offer the management with a more comprehensive comprehension of the figures (Stickney & Weil 2006, p. 90). These reports are also utilised as part of the managements yearly report to the firm’s stockholders (Alexander, Britton & Jorissen 2005, p. 36). Workers also want these statements in formulating joint bargaining unions with the administration, in the case of labour movements or for people in talking about their compensation, rankings and promotion (McClain & McLelland 2008, p. 1). Future investors use financial statements to study the practicality of investing in a firm. Financial studied are normally utilized by these investors and prepared by financial analysts, hence offering them the basis for formulating vital investment decisions (McClain & McLelland 2008, p. 1). Financial institutions utilise them to settle on whether to give a firm fresh working capital or prolong debt securities like a long-standing bank loan or debentures in order to finance development and other noteworthy expenditures (Alexander, Britton & Jorissen 2005, p. 37). It is also vital consider that various types of financial statements in order to understand their general purpose. These are consolidated financial statements and government financial statements (Alexander, Britton & Jorissen 2005, p. 38). Consolidated financial statements are financial reports of a cluster where the liabilities, assets, income, equity, expenses, as well as the organisation cash flows together with its subsidiaries, are reported as those of one economic entity (McClain & McLelland 2008, p. 1). The rules for the measuring, recording and presenting government financial statements might be diverse from those needed for normal businesses or NGOs (Alexander, Britton & Jorissen 2005, p. 38). They might use either of two accounting techniques: cost accounting or accrual accounting, or a blend of the two. A whole set of accounts is also applied that is considerably diverse from the accounts of a profit-oriented firm. Personal financial reports might be needed from people applying for a financial aid or personal loan (McClain & McLelland 2008, p. 1). Normally, a personal financial report comprises of one form for stating individually held liabilities and assets, or individual sources of expenses and income, or both. The document to be filled out is decided by the firm supplying the aid or loan (Alexander, Britton & Jorissen 2005, p. 39). Even though, laws vary from one nation to another, a review of the financial reports of a public organisation is normally needed for financing, investment, as well as tax purposes (Bajkowski 2009, p 56). These are normally done by auditing firms or independent accountants. Outcomes of the audit are summed up in an audit report, which either offers an untrained opinion on the financial reports or credentials as to its accuracy and fairness (Alexander, Britton & Jorissen 2005, p. 39). The audit belief on the financial reports is normally incorporated in the yearly report. There has been extensive legal conflict over whom a financial auditor is answerable to. Because audit findings tend to be forwarded to the shareholders, it is normally considered that they owe a lawful obligation of care to them (Bajkowski 2009, p 56). However, this might not be the situation as determined by ordinary law precedent. In nations such as Canada, financial auditors are answerable only to investors by a prospectus to purchase shares in the main market. In the U.K., on the other hand, auditors also answer to potential investors if they are aware of the potential investor, as well as how they would utilise the information in the financial reports (Bajkowski 2009, p 56). These days, auditors tend to contain in their reports accountability limiting language, discouraging any person other than the main addressees of their statement from depending on it (Alexander, Britton & Jorissen 2005, p. 39). Accountability is a significant matter: in the UK, for instance, financial auditors always have unlimited liability, but, in the U.S., particularly in the post-Enron age, there has been significant concern on the precision of financial reports. Corporate officers are individually accountable for fair financial reporting permitting those being addressed in the report to have a proper sense of the company. 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Wallace, G 2011, Balancing conflicting stakeholder requirements, Journal for Quality and Participation vol. 18, no. 2, pp. 84-98. Woodward, D G, Edwards, P & Birkin F 2007, Organizational legitimacy and stakeholder information provision, British Journal of Management vol. 7, no. 1, pp. 329-347. Read More